There are a few things you can reliably count on this time of year: The winds are a little less biting. The daffodils are finally making an appearance. Tax professionals have that “tell me it’s almost over” look as we enter the home stretch for individual returns. And in many parts of the country, especially ACC country, where I come from, just about everything stands still on Selection Sunday: March Madness is just around the corner.
Whether you’re playing for real money in Vegas, your office pool at work, or just play along with your friends, here are a few tips to keep in mind as March Madness heats up:
- Enter the office pool. I’m not a betting girl. And I’m not telling you to bet. But if you’re going to bet on sports, your office pool may be the way to go. Why? Because the folks that tend to enter are generally those that play the odds occasionally – as opposed to your hardcore bettors. I’m not saying that the good folks at Forbes aren’t great at basketball but the chances are that those in my office, like yours, tend to be the ones that will bet on their sentimental favorites or their gut as opposed to a complete analysis. Yes, Nate Silver or Stephen Smith could be your office mates but I’m guessing they’re not. That makes your odds of winning – even if you’re not a rabid basketball fan – not so very far from everyone else’s.
- Keep good records. It doesn’t always cost money to enter your office pool since sometimes you’re just playing for fun and possibly lots of bragging. But sometimes you do play for money at the office – or online (using, for example, a fantasy sports site).
If you play and you win, chances are that your officemates will pony up their cash but they won’t be scrambling to provide you with a federal form W-2G, Certain Gambling Winnings (downloads as a pdf).
A form W-2G is used for tournaments and wagers when the winnings, after the cost of playing, are $600 or more and at least 300 times the amount of the wager. A form W-2G will also be issued if winnings are subject to federal income tax withholding: this includes backup withholding and well as regular gambling withholding. “Regular” gambling withholding is a flat 25% rate if your winnings from a gambling pool minus the cost of your wager are more than $5,000. Remember that gambling winnings don’t just include cash – it also includes non-cash payments like watches, electronics, vouchers and whatever else your fellow gamblers offer up.
If you win on some fantasy sports sites, you may instead be issued a form 1099-MISC since those sites take the position that they aren’t gambling sites. For more on a form 1099-MISC, click here.
Even if you don’t receive a form W-2G or a form 1099, your gambling winnings are reportable as income. You’ll want to be sure and document the exact amount of your winnings for tax purposes – especially after you’ve bragged all over Facebook and Instagram. - Not all statistics are created equal. Having a perfect bracket is a pretty impossible feat (just ask the folks who played in Warren Buffett’s $1 Billion Basketball Challenge in 2014). Most office pools, however, don’t require you to be perfect. Most don’t even require you to pick the winner. Most simply require you to have the most points based on a formula. With some contests, you can win by choosing the most winners and not necessarily the best winners (there is a distinction). That just means you have to pick better overall than everyone else in the room: that’s a lot more doable than besting thousands of other hopefuls.
When you’re choosing your brackets, be most thoughtful in the first round. Those are – Cinderella teams excepted – the easiest to nail down. According to Nate Silver, on average, favorites in the first round have a 78% chance of winning. It goes down from there: by the time you reach the Sweet Sixteen, the favorites only win 61% of the time. - Do your homework – but it only helps if you win. I’ve already stressed that your gambling winnings are taxable. But what about offsets? Can you deduct the cost of becoming a winner? What about premium channels, data, websites and related costs to pick the right teams?
If you enter office pools and similar contests as a hobby, the IRS has consistently ruled that related expenses – no matter how integral – are personal in nature and not deductible. In that regard, gambling for sport is treated differently from all other hobbies. The only offset you can take – after deducting the cost of your winning wager – is the total of your gambling losses for the year. Those losses are claimed as miscellaneous itemized deductions reportable on a Schedule A. Excess gambling losses are lost forever: not only can you not deduct more losses than winnings in any tax year, you can’t carry excess deductions forward or backward.
If, however, gambling is your business, you would report your winnings and your related expenses on a Schedule C. If that’s the case, your expenses aren’t limited by your income and are fully deductible. This hasn’t always been the case: the IRS has traditionally taken the position that section §165(d) of the Tax Code which allows gambling losses “only to the extent of the gains from such transactions” is the only deduction allowable to gamblers. Many professional gamblers disagreed, taking the position instead that §162(a) of the Tax Code which allows for business expenses should apply.
In 2008, the Office of Chief Counsel at IRS released a memorandum (downloads as a pdf). It’s important to note that a memorandum isn’t supposed to be relied on as gospel. It even says so right in the page: “This advice may not be used or cited as precedent.” But it does give you an idea of how IRS might address some of the underlying issues. The conclusion the IRS reached when asked about this matter is:The limitation in § 165(d) applies only to wagering losses, not to expenses incurred to engage in the business of gambling. Those business expenses are subject to the ordinary rules governing deductibility under § 162(a).
Assuming that the IRS stands by its own (though admittedly covered-with-disclaimers) position, business expenses for professional gamblers are deductible so long as they meet the “ordinary and necessary” tests. So beer and Cheetos while watching the game aren’t deductible. But premium content and insider tools might be. I said might. It’s all facts and circumstances dependent – consult with your tax professional for the specifics.
- It’s anybody’s game. I know. I’ve said that statistically, the favorites tend to win. But that’s not always the case. This year, Villanova, a heavy favorite, may have lost its first seed opportunity after losing to Seton Hall for the Big East Championship – that means that they’re beatable in the tournament. The University of North Carolina at Chapel Hill is certain to get a good seed after winning the ACC tournament – and solidly beating former powerhouse Duke in the process. And former shoe-ins Syracuse and Temple remain solidly on the bubble waiting for their fate to be sealed later today. Upsets are possible (my all-time favorite upset was when Jimmy V’s NCSU team made an amazing dunk at the buzzer to edge out Houston in the 1983 finals). But they don’t happen often. In the end, it’s who wins when it matters the most that counts.
- It’s not about winning or losing but how you watch the game. This year, NCAA March Madness Live will allow fans to watch live streams of the games across 12 platforms, including Amazon Fire TV, Apple TV, Roku players and Roku TVs, Amazon Fire tablets, iOS and Android mobile devices, Windows handsets, Web browsers, and the Apple Watch. With so many ways to watch, it’s a certainty that employees will be watching at work. According to Challenger, Gray & Christmas, employers could expect to spend nearly $3.9 billion in lost wages paid to unproductive workers in the first week of the Tournament alone.
Challenger’s advice to employers – and mine? Embrace it. Since most employees plan to engage in a little tournament banter, why not engage the whole office – and make it fun? It’s relatively cheap and easy to put a television in the break room and provide some game time snacks for employees. So long as those snacks aren’t extravagant, that entertainment is free for the employer and tax-free to the employees. It’s considered de minimis, which is a fancy way of saying “of little consequence.” Under the Tax Code, de minimis fringe benefits are among those that are excluded from federal income tax withholding, Social Security tax, Medicare tax, or federal unemployment (FUTA) tax. They’re not even reported on a form W-2.
Also excluded? Meals on the premises. Since 20% of men surveyed said they would go to a bar at lunch during the workday to watch the games, why not provide an incentive to keep them at the office – and sober? So long as meals are for the convenience of the employer, they, too, qualify as an excluded benefit. A game day spread is a great office perk – complete with tax benefits. - It’s okay to be trendy. I know we all want to be the one to make that pick, that surprise pick that nobody saw coming. It’s fun, isn’t it? When a Cinderella team wins? But while Cinderella may make it to the dance, she rarely waltzes into the Final Four. Sometimes favorites are favorites because it makes sense. This year, Vegas oddsmakers are betting on Michigan State to win (with Kansas in the wings) but you never know. That said, number one seeds and conference champion winners tend to be the safe picks for good reason.
- Have abackupp plan. Playing the odds is fun. But unless you’re really good at it, it’s not your best long-term investment strategy. A survey by MSN indicated that a third of people believed their March Madness bet would offer a better return than their 401(k) plan. That math, as you can imagine, is a little bit skewed… During your lifetime, investing just $10 per year, the same as the average March Madness bet, with a 50% employee match (and assuming a 7% return), the average 30 year old would yield somewhere around $3,204.20 at retirement. That’s about $3,204.20 more than most taxpayers will actually make playing the odds and it’s tax deferred. And one more perk: as opposed to gambling winnings, which are immediately taxable, with a 401(k) or IRA, you pay federal income tax on the money at the time of your withdrawal – which could be decades later.
- This might be one time that you don’t want to follow your heart. I always vote my favorites. That’s also why I never win. No matter how much I want Saint Joseph’s and Temple to do well, they won’t end up on top. Statisticians. And the guys who will ultimately win their brackets. Not those of us sniffling into our sleeves for a great story. Those teams at the bottom? Historically, the winning percentage for teams seeded number 16 or lower? The Round 1 winning percentage for those teams since 1985, with 0 wins and 124 losses, is a dismal 0%.
- Understand that it’s just a game. Unless it’s not. Picking brackets is fun for me. Because it’s a game, nothing more. I don’t have a compulsion to gamble. If you feel that you have a problem with pathological gambling, please seek help. Many support groups are free but if you do have to pay up, you might be able to deduct the expense on your federal income tax return as a medical expense itemized on a Schedule A. Not all programs will qualify but generally, inpatient treatment at a therapeutic center for gambling addiction should meet the definition of a qualified medical expense. If you’re not sure if your program qualifies, ask your tax professional for more information.
With just a few more hours to go, it’s time find out who makes the tournament. As a sports fan, I love this time of year. And yes, it’s fun to speculate about the possibilities. But don’t get too wrapped up in the idea of winning – you’ve got work to do!
(Author’s note: The brackets are now up. Check them out here.)